Is It Time for an ERISA Reboot?

Nearly 50 years since the Employee Retirement Income Security Act of 1974 became law, many experts in the retirement industry believe it is due for a reboot, especially at a time when retirement readiness is on the decline, savings levels are low and defined benefit plans are headed toward extinction.

David Morse, a partner in law firm K&L Gates LLP, says an “ERISA 2.0” should include several updates, including universal access to retirement savings, the return of defined benefit pensions and an embrace of defaults and technology.

While anyone, regardless of their employment status, can open an individual retirement account or a regular investment account to save for retirement, most do not without a nudge from an employer. But more than 50% of the private sector workforce consists of workers whose company does not offer any type of plan, gig workers, the self-employed and frequent job-hoppers, and these are left in a “savings desert,” according to an article Morse published in the Benefits Law Journal.

As of June 2023, Americans held $10.2 trillion in employer-based defined contribution retirement plans, of which $7.2 trillion was held in 401(k) plans, the Investment Company Institute reported in September. In addition, total U.S. retirement assets were $36.7 trillion, as of June 30.

But according to recent EBRI data, high inflation caused many participants to decrease their retirement savings, and Americans’ overall confidence that they will have enough money to live comfortably throughout retirement has declined.

Decreased retirement savings were most common among Hispanic workers, as 40% of this population decreased their savings, and more than half of that group stopped saving completely in response to inflation, TIAA found.

Morse suggested that an ERISA 2.0 should give all U.S. workers access to some sort of savings program, whether through an employer 401(k)—even without a match—or a state-run auto-IRA.

“Every worker [should] be able to have a portion of their pay withheld and contributed and invested into some plain-vanilla index fund, lifecycle fund or something,” says Morse, who recently spoke to PLANSPONSOR about his ideas. “They also should be automatically enrolled with a right to opt out. Just low-cost, simple, so at least people would be able to save money if they wanted to.”

Angela Antonelli, a research professor and the executive director of the Center for Retirement Initiatives at Georgetown University, says when ERISA was enacted almost 50 years ago, it was fundamentally ensuring that employers who were offering defined benefit pension plans kept the promises they had made to workers.

“What ERISA didn’t necessarily do was to make employers make new promises,” Antonelli says. “It was protecting the promises that were being made, but not necessarily making them make new promises to workers.”

Today, employers are not required to offer a retirement plan. Antonelli is a proponent of the increase in state-sponsored auto-IRAs, which aims to increase access to retirement plans and close the existing gap.

“One of the things, as we look to the future of our legal and regulatory framework, is, ‘OK, well, states are stepping up to fill the gap. The private sector is doing more. But more broadly, should something else be done at the federal level to achieve universality?’” Antonelli says.

A Return of Pensions?

While many plan sponsors have now terminated, or are planning to terminate, their defined benefit pension plans, and very few are opening new DB plans, Morse argued that an ERISA 2.0 should enable employers to adopt a pension-like plan whereby workers receive lifetime income, but employers are only responsible for the annual contribution, not a lifetime liability.

He argued that these retirement plans would still be an effective, low-cost vehicle for paying lifetime income, in part by allowing participants to pool their mortality risks at a lower cost than possible with individual annuities or life insurance. For this to work, Morse said benefits would have to be adjusted (up or down) based on long-term investment and mortality experience.

“I think employers would be willing to do it if they didn’t have any downside,” Morse says. “Once they make the contribution, they would be finished with it.”

Morse also believes that “constant fixes” to ERISA have made pensions toxic to employers. For example, he says in the late 1980s and 90s, if a plan was overfunded, an employer could recapture the plan’s excess assets by pulling them out of the plan—so long as the plan could still meet its liability. But because this was seen as an abuse, Congress passed the Pension Protection Act of 2006 and instituted high tax penalties, or reversions, if a company took back excess assets from its plan.

“Employers were penalized if their plan was underfunded because they could get hit with a surprise liability if investment markets didn’t do as they were expected to do, but at the same time, if things went better than expected, they couldn’t take advantage of it,” Morse says.

Michael Kreps, chair of Groom Law Group’s retirement services group, says the fundamental challenge regarding defined benefit pension plans is that there is a “disconnect between the employers’ interest and systemic interests.”

Employers start plans for labor reasons, like attracting and retaining talent, Kreps says. Some employers are more paternalistic than others, and Kreps says some have incorporated lifetime income into their DC plans, but there remains a significant fear of litigation.

“The challenge in the defined contribution world is that it is [the employer’s] responsibility to be prudent and to manage the plan in a way that doesn’t subject [them] to unnecessary risk, which means given all the litigation exposure from DC plans, they’re very gun shy,” Kreps says. “While in some plans, it might be in the participants’ best interest to have some sort of lifetime income option, employers shy away from it because they’re worried about the cost and burden of litigation.”

As a whole, Kreps says he thinks the industry can take steps toward reducing unequal outcomes by focusing on professionalizing and aggregating plan administration. He argued that pooled employer plans are worth exploring in more depth.

“Some people thought PEPs were going to expand coverage, but I think a more accurate, or honest, way to think about what PEPs were trying to do was to give small employers a way to participate in a plan that was professionally managed and then take the legal responsibility and put it on that professional, rather than trying to have a small employer be legally responsible,” Kreps says. “There’s probably more that can be done to improve that and make [PEPs] a more appealing structure.”

Embracing Defaults and Technology

Although the SECURE 2.0 Act of 2022 encouraged employers to adopt more automatic features into their DC plans and mandates those features for new plans that start after December 31, 2024, Morse argued that regulators remain consistently several steps behind best practices, and more can be done to embrace these features.

Defaults have proven effective at increasing participants’ savings, and Morse said an ERISA 2.0 should “embrace choice architecture, including requiring all 401(k)s to have automatic enrollment, escalation and periodic reenrollment of non-savers.”

Antonelli says it is also worth considering if a future legal and regulatory framework should embrace defaults in the decumulation phase of retirement, in addition to in the accumulation phase.

In addition to defaults, an ERISA update could better utilize modern technology. One example provided by Morse was a “lost-and-found” database created by harnessing information stored by the Internal Revenue Service and the Social Security Administration, similar to a key SECURE 2.0 provision. Technology could also help make IRA and 401(k) rollovers easier and improve communication.

While existing rules encourage electronic disclosure, Morse argues that regulators have avoided full adoption, attempting to protect the small minority who do not use smartphones or tablets. He advocates for new ERISA rules to be flexible enough to allow experimentation and adoption of new technologies.

With so many potential updates to the 1974 framework, an ERISA 2.0 might help pave the way for more participants to access retirement savings and improve their financial security.